The rise of new information technology is likely to bring about three broad changes to the commercial brokerage industry. The first, which already is occurring, is the development of specialist firms that perform only a part of the brokerage process such as the research or listings function. We believe the real issue for the commercial brokerage industry is not whether the research function largely will be outsourced in the future, but who will provide and control the data. If a stand-alone, for-profit firm proves itself to be highly profitable, we would expect some type of collective response from the brokerage firms themselves to capture some of that value. Either they will create some type of multiple listing service platform or the stand-alone firms will share some of their profitability with the brokerage houses by lowering fees. Additionally, we believe other parts of the brokerage process will be outsourced to non-brokerage firms as technology advances and adoption rates increase.
The second area of change involves how new technologies have and will continue to influence the existing operations of traditional brokerages. New technologies already have interacted with the trend towards corporate outsourcing to make it easier for large brokerages to more efficiently manage complex portfolios. And, increased transparency that is making the brokerage process more visible to clients is likely to lead to new payment mechanisms that do not rely exclusively on commissions. Project-based fixed prices should become more common, and a fee per hour worked arrangement, possibly with a bonus or other incentive structure, is likely to become more common in the industry. By no means should this be viewed as unambiguously negative for brokers, as the potential loss of commission upside is balanced at least somewhat by the security of an income stream.
The final change we envision is a discount brokerage model that focuses on smaller, relatively low margin transactions. This represents a major change in the underlying business model of a brokerage firm and requires the meshing of new technology and labor force arrangements. While it is not yet clear precisely how such a firm will be organized, the factors necessary for success are becoming more apparent, and we believe the obstacles to success are not insurmountable. That said, not all firms will want to pursue an explicit discount strategy or even offer it as part of a package for clients. However, a successful discount model should be closely scrutinized by all in the industry because it always has the potential to be adapted to serve higher margin clients. We do not believe that a purely electronic or virtual brokerage is feasible in the near term. Widespread standardization of documents and processes would be required for this, and we do not think that is a likely outcome in the near term.
We conclude that these changes are much more likely to affect the tenant rep and project leasing sectors of the industry than they are the investment sales and corporate disposition areas (in the near to medium term, at least). Hence, relative commission growth going forward should be lower in the tenant rep and project leasing sectors.
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